Two cheers for Ukraine

Despite recent progress, Ukraine remains militarily, politically and economically fragile. The EU needs to do more to help.

There are plenty of reasons for those in Kyiv to be optimistic. The government, more competent and less corrupt than any since independence in 1991, is undertaking serious reform. But Ukraine’s success is far from assured: the political class is fractious, Russia may be preparing for more fighting in the Donbass and the economy is shrinking. Without sustained Western attention, the country’s attempt to become a Western-orientated democracy may once again fail, as happened after the ‘orange revolution’ of 2004.

President Petro Poroshenko claims there is now a committed majority for pro-EU policies throughout Ukrainian politics. Some impressive foreigners have taken Ukrainian citizenship in order to become ministers, including the Ukrainian-American finance minister, Natalie Jaresko, and the economy minister Aivaras Abromavičius, originally from Lithuania. Many of those recently elected to the Verkhovna Rada (parliament) are young, bright and not beholden to oligarchs. Vigorous NGOs monitor the government’s actions and make a fuss when standards slip.

Reform-minded officials report that serious efforts are being made to tackle corruption. A new prosecutor-general, appointed in February, has made a start on going after corrupt officials (his deputy is a Georgian who overhauled the prosecutor’s office in Georgia) and almost 500 anti-corruption cases are underway. So that ordinary people can see the benefits of the crackdown, the government has made a priority of police reform. And after a four-month delay, it has appointed a head to the new Anti-Corruption Bureau.

There is much talk in Kyiv of ‘de-oligarchisation’. The government has started to take back control of state-owned enterprises (SOEs) which the oligarchs have – till now – de facto controlled through minority shareholdings. In March, Poroshenko fired Ihor Kolomoisky, from his job as governor of Dnipropetrovsk: Kolomoisky had deployed a private militia to defend his business interests in a state-owned oil company against the state. Prosecutors are investigating the affairs of Rinat Akhmetov, Ukraine’s richest man. The Rada has passed several laws that hurt the business interests of one or other oligarch. But business and politics are still unhealthily mixed: Poroshenko himself has not yet fulfilled his promise to sell his own corporate assets, including media interests.

Both Poroshenko and Prime Minister Arseniy Yatsenyuk have links to rival camps of oligarchs. Though tensions between them are serious, they are under Western pressure to maintain a united front. Yatsenyuk may want to be president but is currently less popular than Poroshenko, not least because he gets much of the blame for the country’s economic woes.

Both men have flirted with Ukrainian nationalists in an effort to court popularity. Poroshenko appointed Dmytro Yarosh, the leader of the far-right ‘Praviy Sektor’ group, as an adviser to the chief of the general staff. Meanwhile the Rada passed a law making it a criminal offence to criticise the role of the extreme nationalist organisations which operated in Ukraine from the 1920s to the 1950s, even though some carried out atrocities against Poles and Jews (at the time of writing, Poroshenko has yet to sign this law). The Rada should not waste its time on laws which do nothing to modernise Ukraine but help to sustain the Russian narrative that fascists run Kyiv.

Ever since the birth of the Maidan movement in November 2013 – when the then president, Viktor Yanukovych, rejected the EU’s Deep and Comprehensive Free Trade Agreement (DCFTA) – Ukraine’s politicians have had to look over their shoulders. When things are going badly on the battlefield or in the economy, there are mutterings about 'another Maidan'. But Ukraine needs a period of stability, rather than more unrest, in order to build its strength.

The ceasefire agreed in February, as part of the ‘Minsk 2’ agreement, is fraying, with soldiers being killed nearly every day. Russian troops remain in the Donbass, training and equipping separatist forces. On April 23rd, NATO’s secretary-general, Jens Stoltenberg, reported a substantial Russian build-up along the border with Ukraine and also inside the country. Ukrainian forces are finally getting some Western training, from the US, the UK and Canada, and some non-lethal military equipment. But Kyiv’s politicians also want defensive weapons: they believe that the Russian president, Vladimir Putin, plans more territorial conquest. If Russia does grab more land, Western governments should step up military assistance and consider giving Ukraine the means to defend itself. Ukraine’s politicians also want NATO membership (though they know it is not on offer for now); opinion polls show that just over half the people agree, up from a small percentage before the war began.

Poroshenko wants UN peacekeepers on the border between Russia and Ukraine to prevent further aggression, but Russia rejects that as contrary to the Minsk 2 agreement. Ukraine's problem is that this text (analysed in a recent CER insight) is ambiguous and impossible to implement. It says "a dialogue is to start on modalities of conducting local elections in accordance with Ukrainian legislation", including an interim law on "special status" – meaning greater decentralisation of power than in the rest of Ukraine – for the conflict areas; it does not specify with whom the dialogue should be conducted. It also calls for Ukraine to enact constitutional change, decentralisation and a permanent law on special status, all by the end of 2015, but is unclear on the sequencing of all these requirements.

The Ukrainians say that there must be free and fair elections in the conflict areas first, so that they have interlocutors with democratic legitimacy to deal with; the Russians say that the Ukrainians should negotiate the constitutional changes with the de facto authorities of the so-called Donetsk and Luhansk People's Republics and then hold elections later. Diplomats from Germany and some other EU countries think the Russian interpretation of the Minsk 2 agreement is correct, but US diplomats take Kyiv’s side.

Whatever the text was intended to mean, the reality on the ground is that elections cannot be held unless the Russians and their allies agree; and they will not agree until they have the autonomy they want. But if Ukraine accepts elections on Russian terms, and the current separatist leaders are confirmed in office, all hope of free and fair elections and the possibility of changing the region’s leadership in future elections will be lost; the Minsk agreement says that once elections have been held, the Kyiv government cannot sack the local authorities.

Somehow, the constitutional changes and the elections need to be synchronised. One possibility would be for the Ukrainian government to accept the separatist leaders as provisional interlocutors and negotiate a deal with them on special status for their territory. A referendum on the special status and local elections could be held simultaneously, according to Ukrainian law and subject to OSCE monitoring; and the separatist leaders would become legitimate if voters chose them and approved the new status.

But even if the timetable can be fixed, Ukraine and Russia disagree on the nature of decentralisation. Poroshenko emphasises that most Ukrainians do not want a federal constitution with broad regional autonomy. Russia wants the Donbass to have an effective veto over Ukraine's membership of the EU and NATO (as Republika Srpska has over Bosnia's big decisions). There is no obvious way of preserving the unitary state wanted by most Ukrainians while giving the rebel entities the blocking power desired by Russia. The West should avoid endorsing any arrangement likely to produce Bosnia-style paralysis.

The biggest reason for worrying about Ukraine, however, is neither the politics nor the military situation, but the economy. In the first quarter of this year, Ukraine’s GDP was 15 per cent lower than a year earlier, and it is still shrinking. Foreign currency reserves are only $10 billion, and that is after a recent $5 billion IMF disbursement. Putin's game may be to wait until Ukraine defaults, and economic woes push impoverished people onto the streets – and then offer assistance in return for the installation of a new, more Russia-friendly regime.

Senior officials in Kyiv claim that Ukraine will not undergo a disorderly default, even though at least $40 billion is needed over the next five years to balance the budget. They reckon it will come from the IMF ($17.5 billion) and the restructuring of debts ($15.3 billion), with the balance provided by friendly governments and the EU.

But the Ukrainian authorities know they need still more cash to stabilise the economy and then to generate growth. Speaking at the Lennart Meri conference in Tallinn, on April 26th, Anders Aslund of the Peterson Institute urged European central banks to make $10 billion in currency swap credits available to Ukraine, to strengthen its foreign currency reserves (and thus make a speculative attack on the hryvnia less likely). They could do so with policy conditions attached, thereby reducing the likelihood that the reserves would need to be used.

The government needs to create an environment that is attractive to foreign investors. Improving the rule of law is crucial. The government has plans for bringing more of the grey economy into the legitimate sector so that it pays tax. The measures demanded by the IMF, such as cutting pensions and phasing out energy subsidies (to reduce wastage of energy), are essential – but will be painful and unpopular.

The Rada took a crucial step on April 9th when it passed a law to break up the state gas company, Naftohaz, into transit, storage, supply and production businesses. This should bring Ukraine's gas market into line with the 'unbundling' prescribed by the EU's 'third energy package' (which Ukraine’s agreements with the EU oblige it to implement). Ukraine has managed to reduce its dependence on Russian gas, thanks to 'reverse flow' arrangements with EU neighbours.

Reformers in Kyiv want the EU to increase its role in Ukraine. If Russia will not allow UN peacekeepers, many Ukrainian politicians would like an EU police mission on the Russian border; and they would like more support for police reform. Poroshenko wants the EU to do more to fight Russian propaganda and to help broadcasters compete with Russia's output. One idea mooted is for the EU to help establish a Russian-language news agency that could operate throughout former Soviet countries.

Poroshenko also hopes that at the forthcoming Eastern Partnership summit in Riga, the EU will offer visa free travel to Ukrainians, as it has done for Moldovans. Though Ukraine has made some progress on meeting EU standards for border control, there are still technical obstacles to lifting visa requirements, so he is likely to be disappointed. The Union will have to reassure Ukrainians that the delay on visa waivers is not a political signal that Ukraine should be kept at arm's length.

The DCFTA between Ukraine and the EU is important for the country’s future, providing a roadmap for creating a more competitive economy. But although the EU has unilaterally opened its markets to Ukraine, in line with the agreement, Kyiv announced in September 2014 that it was postponing the implementation of its side of the DCFTA. This was mainly because of Russian pressure (though some Ukrainian oligarchs were happy to maintain protection from EU competition). Moscow claimed that the DCFTA would damage its economic interests, and called for trilateral discussions with the European Commission and Ukraine over how the agreement was applied. These technical talks started last autumn. The Commission reckons that none of Russia’s complaints stand up but Germany has chided Brussels for not doing more to reassure the Russians.

Poroshenko now says he hopes for implementation by the start of next year. The sooner the better: once Ukraine meets EU standards, its industries will be able to export more easily not only to the Union but also to anywhere else that recognises EU standards. That way, if Russia responds to DCFTA implementation by blocking Ukrainian exports, as it threatens, Kyiv will have other options. The EU should do all it can through technical assistance and twinning arrangements to ensure that Ukraine’s administration has the capacity to make the DCFTA work.

European unity over the sanctions regime against Russia has been, so far, impressive. But EU leaders have not yet shown a similar determination to support the government in Kyiv. At an EU-Ukraine summit and related donors’ conference, on April 27th and 28th, EU leaders failed to come up with any fresh money. The EU should unlock its vaults, while making further money conditional on the continuation of reform.The government in Kyiv is doing enough of the right things to deserve support.

Charles Grant is director of the CER, and was recently in Kyiv on an ECFR study trip. Ian Bond is director of foreign policy at the CER.

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Winner of the Prospect 2015 Think Tank of the Year Award - UK International Affairs